Two Ways to Profit From the Obama Administration’s Energy Dilemma

By , Money Morning •

There's an epic confrontation brewing inside the new administration of U.S. President Barack Obama.

And it has nothing to do with the controversial economic stimulus package, or the new banking-bailout blueprint that U.S. Treasury Secretary Timothy F. Geithner is expected to unveil today (Tuesday).

This "other" confrontation has to do with energy. And the two sides are very clearly delineated.

On the left is renewable energy. On the right: Secure access to oil.

Upping the ante in this already monumental debate is the huge decline in the stock and commodities markets - a skid that's firmly etched in investors' minds. Here's why.

Anyone who followed the Obama campaign remembers his pledges to ensure forceful action aimed at reducing greenhouse gas emissions by raising energy efficiency, increasing the use of "greener" energy sources, and rolling out emissions standards that would apply across the nation.

And only a couple of weeks ago, as we sat fixated on his inaugural speech, the new president reminded us of the need to harness the power of wind and sun to safeguard the environment. 

But he also unmistakably reaffirmed the importance of energy security to America.

So, in building his cabinet, President Obama has positioned some heavyweights to back up his words, on both sides of the debate.

The Dilemma

How will these seasoned veterans, as they set out to accomplish their own objectives, reshape the future of energy policy?

Well, one sure bet is to expect a regular stream of abundant pressure from the environmentalists. They will be eager to legislate new standards for greenhouse gas emissions, and they'll appeal to the president's stated goals of shifting energy use toward environmentally friendlier technologies. 

But achieving a "greener environment" brings new costs, such as cap-and-trade schemes, carbon taxes and maybe even new gasoline taxes.

Yet right now, America is contending with the rawest of nerve endings in the form of a highly frail economy that is "teetering on the brink" of an even deeper downturn than we're already ensconced in, thanks to escalating job losses and a massive credit drought.

So it's naïve to think these factors won't influence policy, at least in the near-to-medium term. 

And, to add to the mix, we have to factor in a vital American concern: The U.S. economy would seize up like the Tin Woodsman in a monsoon without the continued supply of foreign oil.

The Team

Defending the "environmental camp" are Carol Browner, Lisa Jackson and Stephen Chu. 

Browner, the former Environmental Protection Agency (EPA) administrator, is now adviser for energy and climate change.  Jackson, who spent 15 years with the EPA and most recently served as New Jersey's environmental protection commissioner, will replace Browner as the new EPA administrator. And Chu, a Nobel Prize-winning physicist and vocal advocate of national-emissions caps, is now the U.S. energy secretary.

In the "secure energy" camp are Gen. James L. Jones and Hillary R. Clinton.

Gen. Jones is Obama's new national security advisor. He is retired from the U.S. Marine Corps and was once the NATO supreme commander. Those who know him say he's well respected (read tough) and fair, with the ability to assess a variety of options, no matter their source.

Probably the most prominent face on the team is that of Clinton, the new secretary of state. As most of us know, Clinton is an experienced politician, and is likely to wield considerable influence that we shouldn't underestimate.

What's Next?

So who will win out? And more importantly, how should you position your portfolio to benefit?
Obama will work hard to seek common ground. But I expect that the pressures of an economy on life support will prevail over the next 12-18 months.

Of the $850 billion stimulus package, a good portion is sure to find its way into green energy, but will only get spent by late 2010.  In the meantime, it will be too risky to cripple the economy further with additional tax burdens and higher costs.

In that case, you can look for the new president to enact legislation that is beneficial to the environment, but will only take effect within about two years. 

That gives the economy a reprieve, and also allows the demand and price of oil to climb back toward the $70 to $80 a barrel, a level that would allow costlier oil production to turn a reasonable profit. 

From an investment standpoint, then, a higher price, and a secure source of oil from U.S. neighbors, means the Canadian oil sands, natural gas, and conventional oil producers should be on your radar, experts agree.

What The Players Are Saying

Both Gen. Jones and Secretary of State Clinton recognize Canada as a stable and abundant source of oil.  That's logical in my view, as Canada's oil reserves are second only to those of Saudi Arabia.

[Editor's Note: By the way - and this is a point that both Money Morning Investment Director Keith Fitz-Gerald and investing icon Jim Rogers have repeatedly made - no independent source has been allowed to verify the Saudi numbers.]

And as it turns out, Gen. Jones is a staunch supporter of Canada and its oil sands. 

As chairman of the Institute for 21st Century Energy, Gen. Jones has delivered a number of defining speeches in which he highlighted energy security as a top priority for America's safety. 

And the Institute supports both Canada and Mexico as strategic sources of oil as America tries to wean itself from the oil of "less stable" nations.  What's more, 21st Century cautions that imposing costly climate change legislation could cause the already foundering U.S. economy to fail.

So while Canada and the United States have longed enjoyed a rather close relationship (usually friendly, though at times antagonistic), I do expect it will become more intense.  Scores of issues, including NATO, the Northwest Passage, harmonized emissions standards, and energy security will take center stage. 
None of this has been lost on the new secretary of state either. 

In her senate confirmation hearing, Secretary of State Clinton thought it vital to mention that "in our efforts to return to economic growth here in the United States, we have an especially critical need to work more closely with Canada, our largest trading partner, and Mexico, our third-largest. Canada and Mexico are also our biggest suppliers of imported energy."

And just running my quick Google search also reveals that, according to the Energy Information Administration, Canada (in top spot) supplies nearly 50% more oil to the United States than does Saudi Arabia (in 2nd spot).  And Mexico's (3rd spot) level of oil exports to the United States are shrinking, as its main oil field, the Cantarell Complex, has peaked, and now depletes around 15% per year.

Facts are facts, and President Obama knows that a healthy U.S. economy needs Canada's secure oil.  Investing in alternative energies is the right action to take, but the costs are high, and the output and payoff are years away. 

Early this year, President Obama will go to Canada on his first official foreign visit.  And Canadian Prime Minister Stephen J. Harper is likely to remind the new president of an important statistic:  Alberta's oil sands already export 500,000 barrels of secure oil to the United States every day.

How To Play This Trend for Maximum Output

Two of the biggest names in Canadian oil should benefit as this scenario plays out. They are Suncor Energy Inc. (SU) and EnCana Corp. (ECA).

Suncor is an integrated energy company, and one of the largest oil sands companies around.  This is no junior explorer.  It produces 220,000 barrels of oil equivalent per day (BOE/D).  And the company is currently tremendously undervalued.

They have ambitious plans to expand as well, to 550,000 (BOE/D) by 2012. Current oil prices would not justify the investment, but that's if you think oil's staying at $40, which I don't.  Refining and marketing are also significant to Suncor's business.  The company's 160,000 (BOE/D) refining capacity provides a higher value with respect to its oil sands assets.

Downstream, Suncor also owns 300 Sunoco gas stations in Canada, 44 Phillips stations in Colorado, and offers diesel fuel to corporate clients directly from its Canadian terminals.  All of this ensures direct access to customers for the company's end products, which protects cash flow under tight credit conditions. 

In order to process all that tar sand into oil, Suncor needs plenty of natural gas.  And it's established a significant collection of natural gas projects that are able to amply supply its internal production, while generating excess to sell into the market. This internal natural gas asset bodes well for the company's self-reliance, as well as its investment attractiveness. 

And interestingly enough, Suncor has forayed into alternative energies, as well.  The company has four wind farms in Ontario, Alberta and Saskatchewan, and runs the largest ethanol facility north of the U.S. border.

Both of these "green" energy projects help provide two vital benefits:

  • Diversification.
  • And carbon credits.

Should a cap-and-trade scheme eventually be implemented, these credits would help offset current production emissions.

Suncor needs $49 a barrel oil to break even. So unless you think that we're going to remain at or below that level for an extended period, you'll want to own this company for the long term.

The aforementioned EnCana is another leading oil-and gas-producer in North America, with 100% of its production and reserves on this continent. Natural gas production is in the neighborhood of 2.2 billion cubic feet per day, and oil and natural gas liquids are about 120,000 barrels per day, with about 50,000 of that from oil sands.

Together with ConocoPhillips (COP), EnCana has formed an integrated North American heavy oil business.  EnCana's contributions to this 50/50 venture are two oil sands projects with 6.5 billion barrels of recoverable resources. Conoco's contributions are Illinois and Texas based refineries with heavy oil processing facilities.

About 80% of EnCana's current production is in natural gas, which is interesting for two reasons:

  • First, natural gas was recently trading at roughly $4.50 per thousand cubic feet (Mcf), yet the company has hedged its production through October '09 at $9.15 Mcf, allowing for considerable profit protection.
  • Secondly, natural gas is likely to be favored by the new Obama administration - especially for power generation, since it burns much more cleanly than coal.

For the investor seeking an energy play, EnCana is also a more conservative pick than Suncor, due to its higher relative natural gas revenue, its venture with ConocoPhillips, and more diversified sources of income.

And recently, Innovest Strategic Value Advisors (a New York based research firm) included EnCana in its Top 100 list of most sustainable large companies in the world, citing EnCana's above-average investments in renewable energy.

Yes, it's true that oil sands production brings about higher greenhouse-gas emissions.  But oil-sands producers are aware of this.  The province of Alberta will spend $2 billion to develop new methodologies to sequester large amounts of carbon dioxide underground to negate these unwanted effects.

So when you boil things down, Canada is far and away the largest, nearest, most reliable source of friendly oil for the United States.  And until the U.S. economy recovers during the next year or more, transforming "green" energy into "affordable" energy will remain more of a challenge than a reality.

[Editor's Note: In the midst of a financial crisis that's eradicated more than $6 trillion in shareholder wealth, the profit search facing U.S. investors is even tougher than ever. Money Morning is offering a new report that details the additional dangers posed by the ongoing bailout payouts and the stimulus outlays that are to follow. The report is free of charge, and details ways that readers can obtain a complimentary copy of The New York Times best seller, "Crash Proof," in which author Peter D. Schiff predicted the housing bubble and the crash of financial-asset prices long before they happened, and outlines ways investors can avoid further losses and even post profits. To read our free report, and to find out more about this offer, please click here.]

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